3 Issuing costs of state guaranteed bonds - Financial Risk and ...

4 Impact of state guaranteed bonds on bank lending, funding and profitability performance
Tt is a vector of time dummies
Tt*i is a vector of country-time interaction effects
vi is a bank-specific error term
it is an idiosyncratic error term
Time and country effects account for unobserved heterogeneity at the country level and across
time that may be correlated with state guarantees. Time and country interaction effects are used
to capture time-varying country effects that may be correlated with state guarantees. And, due to
the presence of heteroscedasticity and autocorrelation (indicated by diagnostic tests) and the
possibility of contemporaneous correlation, a fixed effects model with Driscoll-Kraay standard
errors that are robust to the abovementioned forms of dependence is used.
Impacts
Table 25 (columns 1 and 2) show the results of the main leverage model. All coefficients are
statistically significant at less than the 1% level aside from profits. Banks’ leverage depends
positively on size, and negatively on the ratio of total earning assets to total assets and dividends.
The models also explain variation in the data relatively well, with an adjusted R 2 of 0.4.
We observe participation in state guarantee schemes (i.e., GUARANTEEDit=1 as opposed to
GUARANTEEDit=0) is associated with lower leverage. Specifically, banks that issued bonds with
state guarantees are likely to be 0.2% less levered than comparable banks that did not issue state
guaranteed bonds.
Moreover, banks that utilised state guarantees more intensively, i.e., through the issuance of a
larger volume of state guarantees, were even less levered. A proportionate increase in state
guaranteed bonds relative to total equity and liabilities of 1% was associated with a 3.4% decrease
in market leverage. This effect was significant beyond the 99% level.
Overall, banks that take up state guarantees are likely to be less levered. Under the regulated
capital view, it may be that participation in state guarantee schemes were implicitly conditional on
banks being more cautious, as reflected in levels of market leverage.
Under the capital buffers view, these banks may have signalled to the market that they are "ailing
banks" through participation in state guarantee schemes, in the terminology used above.
Therefore, they face higher costs of capital than other banks and hold larger capital buffers to
insure against the need to access capital markets.
To test for the robustness of the main results, a number of alternative specifications were
estimated, as shown in Table 24, columns 3-8.
A measure of asset risk was added to the main specifications. This is motivated by the following
reasons. Under the regulatory view, regulators may require riskier banks to hold more capital on a
discretionary basis. Omitting risk from our main leverage model, therefore, may lead to spurious
significance of the remaining variables. However, we see that the main results are robust to the
inclusion of a measure of asset risk.
107